The Ugandan government has levied a 10 percent tax on mobile banking transactions, in a move some have criticized as being short-sighted and potentially harmful to the country's expanding mobile money industry.

The country's finance ministry hopes to raise $12m from the mobile banking tax, which went into effect in early July. At least some of this money will come from remittances, which, according to finance minister Maria Kiwanuka, amounted to $767m last year. But the vast majority of mobile banking customers live in Uganda, and faced with rising transaction costs, many are starting to rethink the system altogether. This could spell trouble for Uganda's emerging mobile banking industry and the economic potential it represents.

Robert Atingu, a Kampala security guard, says he is considering opening a traditional bank account instead. "To send 200,000 shillings ($77), if I go to the bank it costs me 1,000 shillings in transport ($0.39), and the bank takes 500 shillings ($0.19). I will save 3,500 shillings ($1.40) over mobile money," he says. "I prefer using the bank."

No other option

Alex Byamugisha drives a boda-boda, or motorbike taxi, in the Ugandan capital. For years he has used his mobile banking account to send rent money to his landlady, and to pay his children's school fees. So far he sees no other option. But, he says, the higher rates are already affecting him.

"I'm trying hard to save money, but I can't save enough. Now I'm going to be able to save even less," he says. "I don't think people are going to be sending as much money as they have been."

The tax is part of a new national budget that seeks to make up for the revenue lost after a number of international donors suspended aid to Uganda last year in response to a multimillion dollar corruption scandal involving the Office of the Prime Minister. Although some of the aid has since resumed, the move nonetheless left the government scrambling to make up for a $214m annual shortfall.

The idea of mobile banking first originated in Kenya, where the UK-based Vodafone, with financing from the UK's Department for International Development, began experimenting with ways to increase the efficiency and security of microfinance programs making small loans to entrepreneurs.

The result was M-Pesa ('pesa' is the Swahili word for money), introduced by Safaricom in 2007. The mobile banking platform has been wildly popular in Kenya, and now boasts over 17 million active users. The African Development Bank reports that over 70 percent of Kenya's adult population now uses the service, compared to around 40 percent of Kenyan adults who have traditional savings accounts.

The economic gains have been equally impressive. A 2009 study by CGAP, an independent policy and research center, found that mobile money systems increased household incomes by five to 30 percent for over half of rural families surveyed.

In Kenya, M-Pesa can be used for everything from sending money home to the village to paying for groceries in the supermarket, and has opened up a whole world of financial flexibility and security to the millions of Kenyans who don't qualify for bank accounts.

Healthy growth

In Uganda mobile banking was slower to take off, but usage has been growing fast in recent years. According to the Kenyan newspaper The East African, the number of mobile banking subscribers in Uganda rose from 2.9 million in 2011 to nearly nine million by the end of 2012, with four mobile phone networks now competing to attract customers to their own banking platforms. Popular services include MTN's Mobile Money, Airtel Money and Uganda Telecom's M-Sente.

But if mobile banking is fast replacing more traditional ways of sending money, one of the main reasons is that up to now, it has been cheap.When that formula changes, price-sensitive Ugandans take notice.

Daniel S (who preferred not to give his last name) owns a small shop in Kampala, selling everyday goods like soap and toilet paper. He says that with the new tax in place, doing business through mobile banking has become so expensive that he is forced to look for other ways to send money to suppliers. "Sending 1m shillings ($400) now costs 18,000 shillings ($7). It's not very fair," he says.

A spokeswoman for Airtel Uganda points out that inexpensive money transfer systems allow small traders and people living in remote villages to conduct business on a scale that wasn't possible before. "Mobile money has revolutionized the way we do business and the way we live our lives," she says.

Although she understands the Ugandan government's need to raise revenue, "sometimes taxes like this can stand in the way of that progress," she says. "We would appreciate if the very key services [such as mobile money] were not taxed as much as the luxury ones. Airtel Money is a service that is enjoyed by and would most affect the poor and very remote people."

Many telecom providers including Airtel have responded to the tax by imposing a flat rate increase for each tier. Although the company's spokeswoman says it's too early to know exactly how much rising costs will hurt the industry, "any tax usually affects business".

But many Ugandans have already made up their minds about the new rates, and have begun taking their money elsewhere.

Daniel plans to go back to delivering cash by hand as he did in the past – precisely the sort of insecure, low-tech system that mobile banking was meant to replace.

And, he says, he's not alone. "Just before the taxes came into effect a lot of people took their savings out of their mobile money accounts," says Daniel. "From now on I'm only going to use it when I need it, when there's no other way out."